Economic Outlook Clouds Tax Reform

WASHINGTON — The chief House and Senate tax writers said Thursday night that efforts to rewrite the nation`s tax code had been dealt a serious ``blow`` by projections of a weakening economy.

Rep. Dan Rostenkowski (D., Ill.) and Sen. Bob Packwood (R., Ore.), broke off talks shortly after midnight after being told that their proposals for a new tax code would each generate $17 billion less over five years than the current code.

The new estimates resulted from recent government projections of lower inflation and less business investment, congressional aides said.

The new figures presented a serious stumbling block since the new Gramm-Rudman-Hollings law requires that any legislation not increase the federal budget deficit. Additionally, President Reagan, kicking off the tax-overhaul drive last year, insisted then that a new tax code generate the same amount of revenue as the current one.

``I told you we were close. We were close. Then bam. It`s a big problem,`` said Packwood, the Senate`s lead negotiator, after meeting with his House counterpart, Chicagoan Rostenkowski.

``It`s a blow to us to be so close, yet so far,`` echoed Rostenkowski. But he added, ``I`m not saying it`s over.``

Another member of the House tax team and Rostenkowski confidant, Rep. Marty Russo (D., Ill.), sounded a more pessimistic note.

``The Senate is willing to throw in the towel. They just don`t want to do real tax reform,`` he said, claiming the revenue problem could be solved if Senate tax writers were willing to curtail more business tax breaks.

The news came as conference committee negotiators were trying to meet a self-imposed deadline of Friday or Saturday when Congress begins a 3-week recess to finish writing a bill drawn from the differing versions passed by the Democratic-majority House and the Republican-led Senate.

Packwood and Rostenkowski had planned to meet through Thursday night to put the finishing touches on a proposal that they hoped would be accepted by a majority of each tax team.

Instead, the meeting lasted less than two hours and ended with the stalemate still intact.

``Maybe a good night`s sleep and clear heads`` would produce a breakthrough when the two men meet again on Friday, said a tired-looking Rostenkowski.

Packwood, pressed by the House tax team to extract concessions from other senators and cut back on tax breaks for oil and gas producers and defense contractors, met intermittently Thursday with individual Senate tax writers.

``I think Packwood has been bargaining in good faith,`` Rostenkowski told reporters. ``But I don`t think he can hold some of his people.``

One senator he singled out was Sen. John Danforth (R., Mo.), who has been defending a current tax rule that allows defense contractors to delay taxes until a contract is completed although they receive periodic payments.

Two major defense contractors, McDonnell Douglas and General Dynamics, have plants in Danforth`s home state.

Earlier in the day, congressional sources said a compromise appeared near on curtailing some tax breaks utilized by the oil and gas industry, which has several strong allies on the Senate tax team, including Majority Leader Bob Dole (R., Kan.).

Before the new projections, the package that Rostenkowski and Packwood were close to submitting to their fellow tax writers would have raised slightly the tax rates previously agreed to, congressional sources said. Under consideration was a rise in the top individual rate from 27 to 28 percent and an increase from 33 to 34 percent for the top corporate rate to help pay for keeping some individual tax deductions.

Both rates would still be significantly lower than the current top rate of 50 percent for individuals and 46 percent for corporations.